Anil ChopraBajaj Capital The one big credit that Budget 2015 can boast of, when it comes to personal investments, is to bring lots of attention and focus on 'Retirement'. Retirement for most of us remains the most ignored goal. To make people save for their retirement, government has a pension-focused scheme in place, called the National Pension System (NPS), administered and regulated by Pension Fund Regulatory and Development Authority (PFRDA) and created by an Act of Parliament. Its a defined-contribution scheme i.e. the benefits(in the form of pension) depends on how much one contributes towards the scheme. Under defined-benefit schemes, pension is a fixed amount thus adding to government’s liability.
What's NewGiven its features, there have not been many takers for NPS so far. This budget 2015 seems to add some spice to the scheme in terms of tax benefits. Under section 80CCD of the Income Tax Act,1961, it is proposed to give NPS an additional tax benefit on investments of up to Rs 50,000 a year. This is over and above Rs. 1.5 lakh a year under section 80C. For someone in highest tax bracket, maximizing his investment in NPS could additionally ( after section 80C) save him about Rs 15,000 a year in taxes.
FeaturesThere are 3 fund options to choose from-equity,debt and balanced. You can also choose your own fund manager. There are PFRDA regulated professional fund managers who invest as per the approved investment guidelines into the diversified portfolios comprising of government bonds, bills, corporate debentures and shares. If you aren't sure which asset to choose -equity or debt, there's a the default option. Further, there's a lifestyle asset allocation option, wherein funds keeps shifting from equity into debt as one age. The plan ends at age 60, and you can commute up to 60 percent of corpus. On the balance, there's compulsory pension from an insurer.
On investing in NPS, you get a Permanent Retirement Account Number (PRAN) through a Central Record keeping Agency (CRA), which captures all your data including personal details and transactions. The initial account that gets opened is the Tier I account of NPS. Optionally, you may open Tier II account. You get an Internet password for online transactions too.
AlternativesBesides the NPS, some mutual funds and insurance companies also offer Pension plan or retirement plan, which are not under the jurisdiction of PFRDA. Apart from this, other retirement schemes includes EPF, Retirement gratuity that is offered by employers to their employees. PPF can also be used to accumulate corpus for retirement. If we have to compare NPS with EPF then the first big drawback with EPF is that it is open to employees of organized sector only whereas NPS is open to all citizens; whether employees, businessmen or self-employed professionals. Hence, NPS has a much bigger canvas.
However, savings invested in EPF grow at a slow pace as 100% investment is made in Government Securities/Debt Instruments which at times do not even beat inflation. On the other hand, significant portion of savings in NPS can be channelized towards Equity market and hence the scope of wealth creation is much higher. Even though withdrawals in the shape of Annuity/Pension in NPS is taxable, still the returns may be higher when compared to 100% Debt oriented EPF.
ConclusionWhile both EPF and PPF are debt-oriented investments, the NPS at least gives an option to invest 50 percent of your savings in equities. One should, however, focus on 100 percent equity-oriented investments to create wealth for long-term goals such as retirement. Equities have the potential to deliver higher inflation-adjusted returns as several studies have shown in the past. Make use of equity-oriented retirement focused schemes for accumulating retirement corpus. See, if you also get section 80C tax benefit on such investments. Once your section 80C limit is exhausted, make use of NPS to additionally save tax. Budget 2015 brings you the opportunity to save tax during your earning period and reap its benefits during the non-earning period of your retired years.
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